Time-varying integration, the euro and international diversification strategy
AbstractThis paper investigates the impact of globalization and integration on the relative benefits of country and industry diversification. Unlike previous models, our factor model allows asset exposures to vary with both structural changes and temporary fluctuations in the economic and financial environment. First, we find that globalization and integration have lead to a gradual convergence of country to industry betas, especially in Europe. Second, not accounting for time-varying factor exposures leads to substantial biases in measures of country and industry risk. Third, even though the edge has structurally decreased, geographical diversification continues being superior to industry diversification.
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Bibliographic InfoPaper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 333.
Length: 58 pages
Date of creation: Jul 2008
Date of revision:
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More information through EDIRC
International portfolio diversification; Country versus Industry Effects; Financial integration; Idiosyncratic risk; Time-Varying Correlations; Regime-switching models; Baele; Inghelbrecht;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
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- Philip R. Lane, 2008. "EMU and Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp272, IIIS.
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